Sunday, August 30, 2009

When people talk about the harmful effects of smoking, most of the attention is on the smoke itself. But everything that produces smoke also produces carbon monoxide, a chemical that, it turns out, may be more immediately dangerous than anything else in tobacco smoke. Carbon monoxide (chemical symbol CO) displaces oxygen in the body, and if enough of it builds up, it can cause the brain to shut down.

The carbon monoxide produced by smoldering tobacco is easy enough to measure, but how much of that actually makes its way into a smoker’s bloodstream? Previously, scientists had merely guessed about this, but new research has measured it by measuring the carbon monoxide in the air a person exhales 30 minutes after smoking. The researchers found that smokers acquire harmful levels of carbon monoxide from all forms of tobacco. The effective carbon monoxide levels are several times higher than was previously supposed.

The greatest danger was found in the recent fad of shisha, or fruit-scented tobacco smoked in a water pipe, usually known in the United States as a hookah. This was found to provide enough carbon monoxide to kill a person. These results startled everyone, including the researchers and the smokers involved. In most smokers, shisha-produced carbon monoxide displaced 8 to 12 percent of oxygen in the smoker’s bloodstream. These are levels somewhat higher than those of cigarette chain-smokers. But the amount of carbon monoxide produced in a pipe depends on the technique and the tobacco, and some smokers generated 10 times as much. (Burning fresh tobacco and inhaling very slowly would probably maximize the carbon monoxide levels, but this has not been tested.) Their blood carbon monoxide quickly passed the threshold level that medically is considered potentially fatal. In the worst cases, carbon monoxide built up to twice that level. There were no reports of actual deaths from this effect, but shisha carbon monoxide deaths surely must be occurring from time to time.

The thought of a few unfortunate people dying a quick death from tobacco smoke is troubling enough, but carbon monoxide affects anyone who breathes it in, and that means it affects everyone who smokes. By displacing oxygen, carbon monoxide reduces the energy available to every cell in the body, and this is especially evident in the brain. Carbon monoxide does not merely dull the brain and cause headaches and confusion, although that is bad enough. It creates a characteristic style of thinking. The carbon monoxide mind:

Thinks paranoid thoughts

Is especially suspicious of things near the edge of vision or hearing

Magnifies things that are immediately present, and loses track of things that are not

Has a diminished belief in time and change, so that it seems that the current experience is doomed to continue forever

The combination of suffering, confusion, paranoia, suspicion, loss of perspective, and hopelessness can be as dangerous as it sounds. People on carbon monoxide make bad decisions and are capable of extremely risky and harmful actions. It is easy to understand why carbon monoxide is associated with suicide. And now that we know how much carbon monoxide smokers inhale from cigarettes, it makes perfect sense that street criminals in literature are uniformly depicted as smokers. The high-risk, no-future thinking that it takes to be a street criminal is just like the kind of thinking produced by smoking tobacco.

It takes hours for carbon monoxide to work its way out of the body, so a person who smokes one pack of cigarettes per week or more has almost all of their thinking affected by carbon monoxide. Because of this, we can expect smokers to see things differently and behave differently.

Some of these differences could have economic significance. For example, we could predict that smokers may have lower saving rates. Part of the reason people save is because of a concern for the future, and carbon monoxide makes it harder to see into the future. It is a cliché that cigarette smokers worry more; perhaps this is reflected in economic behavior in a way that could be measured and verified.

We already knew that tobacco smoking was harmful, so the recommendation that smokers quit smoking is nothing new. Knowing a little more about tobacco’s immediate impact on brain function, by way of the carbon monoxide smokers take on, merely provides another reason to keep tobacco smoke out of your bloodstream.

If you’ve noticed a gradual improvement in restaurant food over the last 10 or 20 years, one of the reasons is that fewer people are smoking.

It’s no secret that smoking kills people’s sense of taste. A moderate smoker can barely taste the difference between a hamburger and a hot dog. Back when most adults smoked, there wasn’t much incentive for a restaurant to provide food that was more sophisticated than that. Even nonsmokers sitting in the same restaurant with smokers wouldn’t be able to taste much detail in the food, so the emphasis was on making food look good — and in the pricier places, having a good story about the recipes on the menu.

There aren’t so many smokers left now, and most restaurants are smoke-free by law. That brings food more to the forefront in a restaurant. The food has to be good. If the tuna is a week old, the pasta salad is mostly mayonnaise, and there is no pumpkin in the pumpkin pie, people will notice, so restaurants are more careful about the way the food comes out. Some ingredients are more fresh, and recipes are scrutinized and tested, instead of merely being copied from one restaurant to another.

Saturday, August 29, 2009

There have been multiple reports of H1N1 flu spreading rapidly in the last week, particularly in Japan and on U.S. college campuses. This is happening even before the summer in the northern hemisphere gives way to fall. Usually, the North American flu season gets going around November, so if flu is hitting three months early, it suggests that far more people than usual may be infected between now and May.

Despite this risk, the rush to release an H1N1 flu vaccine is a big mistake. Some medical groups have gone on record urging their members not to take the new vaccines. It is unrealistic to expect to learn much about the safety or effectiveness of a new drug in just a few weeks, and the tests that are being conducted are very small in size, so any conclusions that come from them are really no more than educated guesses. We won’t know for months how many people will be harmed by the vaccine, nor how many people will be protected.

You might imagine that there is a standard way of creating a flu vaccine, which can simply be adapted to the new shape of the new flu virus. Yet many of the H1N1 vaccines being tested contain ingredients that have never been deployed on such a large scale in any drug. With that high-risk approach, it is quite possible for the vaccine to do more harm than the disease. That is exactly what happened with a rush flu vaccine in the 1970s, and the new flu vaccines are being slapped together faster than that one was.

An untested vaccine that may stop an epidemic provides a situation where the interests of the state are at odds with those of the individual. From the point of view of the United States government, it is rational to put the lives of millions of citizens at risk in order to stop the spread of a disease that could possibly infect half the people in the country. But from the point of view of the individual, taking an untested vaccine to protect against a hypothetical epidemic is not so rational.

You maximize your own chance of survival by waiting to get a vaccination until the new virus proves the risk it poses is greater than the risks posed by the vaccine. If you are basically healthy, that might mean waiting until a fourth of the people in your community have been infected before you seek out the vaccine. But the government authorities have a better chance of reducing the spread of the disease by vaccinating as many people as possible as early as possible. The vaccine may be just as damaging as the disease it protects against, but its effects are not so easily spread from person to person.

Not wanting to wait until even the most minimal tests are complete, the U.S. government is ordering huge batches of untested vaccines to be released about a month from now. These early vaccines carry the additional risk that they could be mostly or completely ineffective — they might create negative health consequences and not provide any protection against the flu virus. This rush to mass-produce an untested vaccine is unprecedented in medical history and cannot be justified by the moderate severity of the new H1N1 flu strain. There are a few people for whom the thought of a flu infection is so frightening that they might choose to take a chance on a vaccine that just might work, and might be safe. For the rest of us, a more rational approach is to wait to find out how dangerous the new flu is and how safe the new vaccine is. That means, don’t get the new H1N1 flu vaccine this year. It is safer to wait until next year.

Friday, August 28, 2009

How many bank failures will there be? The CEO of BankUnited, which was formed by buying a bank out of receivership earlier this year, says he estimates 1,000 bank failures in the next two years, or 10 per week. In the past 10 months we have seen the pace go up from 1 per week to 5 per week, and the economy continues to decline, so what is to stop it from going up again? But it is hard to predict because so much depends on policy decisions in Washington. As it stands, there are more banks than the U.S. economy can support, so it is assured that some banks will have to close. If the government goes to extremes to keep the largest banks operating, it will put enormous pressure on all other banks, and half of them could fail. But if the government allows an orderly shutdown or contraction of the most troubled giant banks, then very few well-managed banks will go under.

One of the reasons it is hard to trust a bank balance sheet is that it is almost impossible to determine the value of many of the assets, especially when the assets are based on real estate. In banking, the value of real estate is determined by a very short paper trail that is easy to manipulate and hard to check up on. This came to light in the federal case against Stanford Financial Group, as its former chief accountant pleaded guilty. Stanford Financial Group’s too-good-to-be-true financial results were created largely by arbitrarily increasing the stated value of real estate and related assets held by Stanford International Bank.

The same accounting machinations could be used elsewhere on a smaller scale to make a bank look not as troubled as it is. A bank that is flat broke could be made to appear as if it is merely stumbling. These days, a bank could pull this off just by valuing troubled loans and foreclosed real estate based on the bubble value of the real estate three years ago rather than its current market value. It is not just the real estate itself that can be pumped up for the financial statements. Mortgage-backed securities are so convoluted that securities based on the same real estate could appear on the same bank’s books three or four times, or on the books of three or four separate banks. Combine these two effects, and abandoned rural land worth $2 million could turn into $15 million in bank assets — albeit assets that are completely illiquid. These assets cannot be sold to anyone, or the whole accounting house of cards would collapse.

I don’t think anyone knows the extent to which these phantom assets are propping up banks today, but whenever you hear anyone in banking complain about problems with liquidity, it is fair to be skeptical, and to imagine that the reason some of the assets cannot be sold is that they do not really exist, at least not the way they have been recorded.

A billion-dollar bank and two half-billion-dollar banks failed tonight. The billion-dollar bank was Affinity Bank, based in Ventura, California, with 7 offices in southern California and 3 in northern California.

Affinity started out in 1982 in the Chinese-speaking community of San Francisco. It changed ownership several times and expanded into southern California. In recent years it had been trying to emphasize business accounts-receivable lending and health care financing. But two thirds of its loans were in commercial real estate, where losses had been piling up since 2007. By the end of the second quarter of 2009 it was critically undercapitalized, and state and federal regulators had given it an August 20 deadline to repair its financial condition.

The locations, deposits, and assets are being taken over by Pacific Western Bank, based in San Diego, but operating across southern California. With the acquisition, it has over $5 billion in assets.

The two half-billion-dollar banks that failed earlier in the evening were Bradford Bank, with 9 offices around Baltimore, and Mainstreet Bank, with 8 offices around Minneapolis.

Bradford Bank had expanded rapidly between 2005 and 2007 by buying up smaller competitors, a strategy that left it in a financially weak position by the end of 2007. Its swing loans, which were meant to be repaid as soon as a building could be sold, ran into problems as the real estate market declined in 2007, and then other real estate loans went bad. Plans to raise capital in the stock market fell apart as stocks declined in 2008, and despite cost-cutting efforts, the bank’s losses continued to mount. A month ago, the OTS rejected a recapitalization plan submitted by Bradford Bank and gave the bank 15 days to raise capital by selling most of its assets or being acquired by another bank.

The locations, deposits, and assets are being acquired by M&T Bank. M&T Bank, based in Buffalo, New York, was already the second largest bank in the Baltimore area.

Mainstreet Bank reported a net worth of negative $5 million as of June 30. It had been losing money since 2008 and had been operating under a cease-and-desist order since January 2009. Observers had been watching for it to fail since at least May.

The locations, deposits, and assets are being taken over by another local bank, Central Bank.

The FDIC estimates costs of $450 million on these three bank closings, but the actual costs are likely to be considerably higher. The FDIC this month seems to be lowballing some of its cost estimates, probably in the hope of obscuring the rate of decline of the Deposit Insurance Fund. Observers say the fund is likely to be depleted around November. When that happens, the FDIC will continue to operate by borrowing money from the Treasury.

Another very small credit union failed today. Free Choice Federal Credit Union, based in Feasterville, Pennsylvania, had 400 members and less than $1 million in assets. The share accounts were purchased by another local credit union, Trumark Financial Credit Union.

Thursday, August 27, 2009

The computing world is buzzing about tomorrow’s release of Mac OS X 10.6, better known as Snow Leopard. As the name suggests, it’s a refinement of the previous version, Leopard, with better speed, smaller footprint, and so on. Most of the mainstream media reviews of Snow Leopard just don’t get it, but The New York Times’ David Pogue realizes this is “a leap forward”:

. . . the big story here isn’t really Snow Leopard. It’s the radical concept of a software update that’s smaller, faster and better — instead of bigger, slower and more bloated. May the rest of the industry take the hint.

The secret behind Snow Leopard that no one seems to want to say to the public is that Apple took a lot of the engineering work that made its operating system fit on the iPhone, and painstakingly applied it to the computer version of its operating system, ending up with changes in 90 percent of its code. The result is sleek in an engineering sense. It’s what you get when you have engineers go over a design again and again, testing thousands of possible adjustments to see which might improve the product. Traditionally, this kind of work hasn’t been done in computer programming. Software engineers breathe a sigh of relief if the product they’ve just shipped actually works for everyone — there’s no time to worry about how clunky it is. Until now.

With the iPhone, Apple had no choice. Clunky wasn’t an option. In a device as small and important as a phone, you can’t have a battery that dies because of software that just barely works. And as a result of that effort, and folding it into Snow Leopard, Apple has positioned itself ahead of a coming trend.

You see, there is a not-so-hidden meaning in the name Snow Leopard. Snow is cold. Cold is the opposite of hot. Computers get hot mostly because of inefficient software that wastes electricity and creates heat. By running more efficiently, Snow Leopard allows a computer to run cooler and use less electricity.

And this is where the computer industry is going — not so much right now, but it will become a big issue perhaps four years from now. Over the last half century, “efficiency” in computer programming has mostly referred to a program that gets results faster. Now, computers are mostly fast enough. In the future, “efficiency” in computing will mostly mean the same thing it means in everything else in everyday life: energy efficiency. On a small scale, energy efficiency prolongs battery life and keeps devices from overheating. On a large scale, it cuts a company’s electric bill, reduces the need for air conditioning, makes it easier to keep the electric grid balanced, and reduces the country’s dependence on imported energy.

Snow Leopard is just the start. Software testing that currently measures only the accuracy of results will also have to start estimating power consumption. A generation of programmers brought up to work with reliability and security in mind will have to be retrained to code for energy efficiency. It will be a huge effort, but if you stop to think how much work computers might do for us a generation from now, reducing their energy consumption will make a big difference.

Wednesday, August 26, 2009

It would be too much to ask the United States, in the middle of the strangest economic episode in over a century, to elect a president who understood what was going on and what was at stake with the economy. To be sure, there are people regularly visiting the White House who do understand the significance of this moment. But their voices are drowned out by others who are confused and sometimes panicked, such as Bernanke, who has inexplicably been renominated to his position.

As to the president, Obama seems to regard the economy as a nuisance, a problem for others to solve while he sets about his priorities of restoring democracy and rescuing the middle class — as if those were objectives that could meaningfully be separated from the economy as a whole. And so, while we may eventually get some help for the queasy downward spiral of the health care sector or the country’s addiction-addled approach to energy, both perhaps in a form that echoes the recent assistance to Detroit, the larger economy will have to take care of itself.

What is more, it will have to do so without the stability that Bill Clinton and Alan Greenspan so relentlessly pursued in the mid 1990s. Even Clinton and Greenspan would be hard pressed to stabilize the economy of 2010 and 2011. But instability does not change the economic imperatives that drive people to solve problems.

The mid 1990s, you may recall, was when the myth of the “hard core unemployed” was finally busted. Yes, there were millions of people who were undisciplined and illiterate, but they proved that they could get organized and learn to read and write if there was a reasonable prospect of a job that might require that. Getting out of the current scrape may similarly require us to bust several economic myths. It scarcely matters which ones — we have plenty to spare.

This is not the kind of change that comes from Washington, even if there were someone there actively managing the economy. It is more likely to come from Detroit, Las Vegas, or Atlanta: in evolutionary theory, high stress leads to rapid change. The topsy-turvy economy of the next 32 months or so will lead to surprising changes. It is hard to predict exactly where the changes will take place, but the need for change — that part is easy to predict.

Tuesday, August 25, 2009

“Hey, Jimmy! You wanted to see me?” Jimmy no longer worked in the auto industry, so I wasn’t sure why he had invited me over to his new office along the docks, but he seemed more relaxed and content than I’d ever seen him.

“Hey, Rick, thanks for coming over. Have a seat. You’re looking good. This is the life, huh?”

“Well, I’ve been having a nice, relaxing summer — is that what you mean?”

“Exactly! No more calling all the car dealers on the phone to get them to promise something you know they can’t deliver, no more walking over to the factories, and — what was that you were always trying to tell me about the factories?”

“Um — that you had too many of them, and they would drive the company into bankruptcy?”

“Well, yeah, and —?”

“Uh, you ran the assembly lines too fast, and the pace of movement clashed with the natural rhythms of the human mind, body, and spirit, leading to angry confrontations, repetitive stress injuries, and bad morale.”

“And you were completely right about that! I mean, look, we’ve gotten another 100,000 people out of those factories, and now the whole town feels so much better. I mean, look, I have time to sit on the dock and catch fish, and you’re obviously in better shape than you were when you were working all the time.”

“Well, yeah, but — a lot of people are out of work — I mean, I’m not working so —”

“Oh, yeah, eventually you have to work on something, but still, it feels good to be out of there. I mean, what’s that big hit song of yours?”

“Hit song?” I paused for a second. “How did you hear about that?”

“I have time to get on the Internet now, and listen to music. That’s what I’m talking about!”

“Oh, yeah, of course. I think the song you’re referring to is ‘Quit Your Day Job,’ with the famous line, ‘Log out, shut down, stand up.’”

“Yeah, and then you got everyone in town into the arena to chant, ‘Q-U-I-T Quit.’ How did you do that?”

“That’s just me and my dog, amplified to sound like an arena full of people. But if I ever get popular enough to play arenas I’m sure everyone will be chanting along just like that.”

“And they’ll all be smiling too, and you know why? Because the idea of quitting your job just feels good. Why do you think consumer confidence is up so much this month?”

“Because one of the questions in the survey is, ‘Do you think this is a good time to make a major purchase, like a car?’ and everyone who just bought a car in the Cash for Clunkers program is answering, ‘Hell yeah! One last time!’”

“Oh, well, yeah, there’s that, but consumer confidence has been going up for months — because more and more people are losing their jobs. And it feels good, especially right now — people get to relax and enjoy the summer. I mean, admit it — do you really wish you were back working for the Emergency Inventory Reduction Task Force again? Like, this afternoon? I hear they’re boosting production again, so by around December or January —”

“Sitting in a hot abandoned dealership with a desk and a phone and a list of phone calls a mile long? That was terrible!”

“Exactly! And with more and more people not working, consumers will be feeling better and better!”

“Hmmm. I see what you’re saying.”

“You’re an economist. Why can’t you come up with a more positive-sounding term for ‘unemployment rate’? When you put it that way, it sounds like something people should worry about — like they should interrupt their vacations to go worry about not having a job.”

“Well, I suppose we could call it the ‘vacation rate.’ Then, when we have the headline that says, ‘White House projects higher vacation rate,’ it will be easier for people to feel good about it.”

“Oh, well, I didn’t mean to put you to work here. — I have another fishing rod, if you want to try to catch something.”

“No, thanks. I’m not so good at anything that’s based on sharp points and edges. — Maybe I’ll just write another song. How does this sound: ‘Sittin’ on the dock of the river’? — no, that’s not quite right.”

“No.”

“Well, how about this then: ‘I hope I never see another car for the rest of my life’?”

Monday, August 24, 2009

Last year a few cargo ships quietly made their way across the Arctic Ocean. This year several dozen cargo ships are likely to make the trip, and some of those have already set out. But cargo companies are clearly still testing the waters, wanting to gain experience and compare costs so that they’ll be ready if Arctic shipping becomes routine in the future.

These are other indications of the increased interest in Arctic shipping:

There were Canadian military exercises this summer in the Arctic Ocean, including a visit by the prime minister.

The U.S. Coast Guard is starting to look into the equipment and skills it would need to operate in the Arctic.

Canada has passed new laws and is considering others to regulate shipping in the Arctic.

Russia is experimenting with a new, larger icebreaker to keep shipping lanes open in August and September.

The Arctic ice is not cooperating particularly well with shippers’ plans. It turns out that the thinner ice, most of it now less than one meter thick, blows around more easily and has a tendency to pile up in shipping channels. That isn’t expected to keep either of the major Arctic shipping lanes closed, but it represents a risk to ships. That issue aside, the volume of Arctic ice appears already to be less than last year’s record low. Ice extent, which is more significant for shipping, could also set a new low this year. This year’s ice melt is essentially retracing last year’s graph and is about 8 days behind the pace of 2007. This is happening despite weather that is not particularly warm or stormy, but has been helped along by winds and surface currents pushing ice toward the Atlantic.

The current melt pattern is unusually symmetric, so the melt could continue later into September, raising the prospect of matching the record low extent set in September 2007.

Sunday, August 23, 2009

There were those who thought that the back-to-school shoppers would never materialize, but I was out this weekend and saw the shoppers with my own eyes. It is the last weekend before schools start to open for the fall, and I saw more than the usual number of weekend shoppers looking for clothing and supplies. But the stores were not crowded. Based on what I heard, Apple was the only store that was crowded, and of course, that is because Apple has small stores.

I counted shoppers in the likely back-to-school stores in one shopping center. The most popular store was Goodwill, with 50 shoppers. There were 20 people in Dollar Tree, where I noted that there was no promotional school supply display inside the store. Five people were browsing the sidewalk sale at Fashion Bug, but when I went inside the store, there were no shoppers to be seen.

And not everyone was buying. At Goodwill, only one person had a shopping cart, and there was not yet anything in it.

I think there will be more shoppers in September, after school has started. Still, it’s easy to see that shoppers are being more cautious about their spending than they were a year ago. Retailers that count on impulse purchases from the back-to-school crowd will be disappointed.

I also took a look at new car lots on the closing weekend of Cash for Clunkers. Most were surprisingly depleted, with only half to two thirds of the normal stock of cars. Most had already taken down their “Clunkers” signs, in advance of the Monday deadline for the government trade-in program. According to reports, many car dealers are squeezed for cash this month as they wait for payments from the Cash for Clunkers program, which may not arrive until next month. In the meantime, they may be unable to order new cars to replenish their inventory.

Saturday, August 22, 2009

Late last month, there was talk of the possibility of a popular uprising in the United States. It was a far-fetched notion to begin with, and now, that talk has died away. The town hall meetings on health care have taken all the steam out of that movement.

There is an enormous level of suspicion about any supposed grass roots movement at this point. It cannot be a grass roots effort if it is run from New York, Washington, and London. The largest group of agitators at the town hall meetings were health care and insurance employees. Some of the most visible turned out to be lobbyists and Republican staffers, and they appeared to be coordinating their efforts. There was an undercurrent of racism among the people who went to disrupt the town hall meetings. After you see the photo of Obama with a Hitler mustache added and hear the rhetoric from the people carrying it, it is hard to escape the suspicion that their real objective is to prevent black people from getting access to health care. Some of the rhetoric we heard was so unfamiliar, so disconnected from the American political discussion, that people wonder whether it was domestic in origin. Those who are less charitable are asking if the people speaking out so vehemently against institutions and policies that exist only in their imaginations are merely crazy. So there is a strong chance that it is not a grass roots movement at all, or if it is, it is the plantation owners coming to get us.

A popular uprising can’t get going if the people who seem to be at the center of it are more worrisome than the government is. It also can’t get going if activists are so divided. The revelation that some of the political action against health care was orchestrated by a political strategist paid with Whole Foods Market money (the supermarket chain’s position is that people should just eat healthy food, like the products they sell, and then they probably won’t need health care) has some activists working on a boycott of Whole Foods Market. When activists work against each other, the powerful interests that actually run things can just sit back and watch.

And people are tired. I saw it in the television pictures of the town hall meetings. When you see how tired people get from a two-hour forum, you understand why so few people stand in line to vote. The Hollywood notion that a popular uprising starts with people saying, “I’m sick and tired and I’m not going to take it anymore,” strikes a chord with people who feel powerless, but the reality is otherwise. Only the strong and energetic can lead any kind of movement. There are not nearly so many strong and energetic people in the United States as we like to imagine.

Friday, August 21, 2009

The Swiss government has come to an agreement with the IRS over accounts at UBS held by U.S. customers. After the deal is finalized next week, UBS will turn over information on about 1/12 of the accounts with U.S. owners. The IRS had sought the identities of all the U.S. accounts at UBS, but says the final agreement will give it information on the accounts that were most likely to be hiding income or assets. Many of the accounts were closed years ago or earlier this year.

This settlement clears up one of the biggest clouds hanging over UBS. The bank had previously agreed to pay $780 million to settle its part in obscuring the nationality of U.S. customers, but to turn over the data that the IRS wanted, it needed to find an approach that would fall within the limits of Swiss banking secrecy laws.

The Swiss government had taken a 9 percent stake in UBS to stabilize it financially, and is now preparing to sell its shares to the public.

At a time when consumer income is falling and many consumers are skittish about keeping their savings in the bank, where will banks’ deposit base come from? This is an important question because when many loans are not being paid on time, a small decline in total deposits can turn into a large decline in liquidity for the banking system. Part of the answer is businesses. Business lending has become so dysfunctional that, even for a large, successful business, running out of cash could mean bankruptcy this year. Even with revenue declining, businesses have no choice but to save more than they did last year. And unlike consumers, who can keep cash at home in the freezer if they choose, businesses have few options but to keep their money in the bank.

This is better news for midsized banks than for large banks. A large business wanting to work within the deposit insurance limits could have deposits in dozens of banks; it cannot safely concentrate all its deposits in a few very large banks the way it might have done in more financially calm times.

The FDIC is preparing to relax rules on who can buy failed banks, especially as they apply to private equity investors, to try to protect its Deposit Insurance Fund. Though the FDIC will not admit this, the fund looks like it will be depleted around November. At that point, the FDIC will be living on money borrowed from the Treasury, and Congress will likely have to take action next year to increase its line of credit.

More foreign banks are likely to be taking over failed U.S. banks in the next year, according to a story in the Wall Street Journal. A significant part of the banking system is already foreign-owned, including 11 of the 50 largest banks, and that may become a trend as more banks fail.

Tonight we saw the first foreign bank buy a bank out of receivership from the FDIC. Banco Bilbao Vizcaya Argentaria SA (BBVA), of Spain, through its BBVA Compass subsidiary, bought the deposits and a matching amount of assets of Guaranty Bank after it failed tonight. BBVA Compass (called Compass Bank prior to the BBVA acquisition two years ago) already had 767 offices across the southern tier of states from Florida to Arizona. BBVA is trying to build up its presence in Sunbelt states that have large Spanish-speaking populations, so it makes sense that it might want to take over a bank with 103 offices in Texas and 59 in California. Another point that made the transaction convenient for BBVA is that BBVA Compass and Guaranty Bank use much of the same operating software, so it will take only about six months to combine their operations. One of the world’s largest bank holding companies, BBVA owns the second largest bank in Spain and the largest in Mexico.

Guaranty Bank is the third largest bank failure this year, with nearly $12 billion in deposits and about $13 billion in assets. It is about half the size of the Colonial Bank failure last week and apparently slightly smaller, in terms of assets, than the BankUnited failure in May. The failure of Guaranty Bank had been widely anticipated, especially after it issued a going-concern warning a month ago. It is only the second bank failure this year in Texas, after two last year, although more are expected.

Guaranty Bank was previously owned by cardboard manufacturer Temple-Inland. It was spun off two years ago, but since then, has never reported a profit. Two billionaire-investors, Carl Icahn and Robert Rowling, own more than a third of Guaranty Bank and have taken the biggest loss in its collapse. Yet the eventual cost to the FDIC, estimated at $3 billion, will be considerably greater.

It was not a good day for banks in the southern United States, as Guaranty Bank was part of a series of bank failures that swept across the South.

The first was ebank, an Atlanta-based bank founded in August 1998 that tried to be the dot-com of the banking business. Despite its national presence, it had only $130 million in deposits. Its attempt to operate on the Internet made underwriting a challenge. It launched an online mortgage division in 2006, which was unfortunate timing, just when the lending bubble was starting to fall apart. A year later, the OTS cited the bank for problems in its approach to real estate loans. By 2008, nearly 10 percent of ebank’s loan portfolio consisted of delinquent real estate development loans, and the bank was looking for additional capital.

The deposits, office, and assets have been sold to Stearns Bank, a Minnesota bank that has already acquired several failed banks this year. The FDIC estimates its costs for this closing at $63 million.

Around the same time, a short distance southwest of Atlanta in Newnan, Georgia, First Coweta Bank failed. It had four offices and $155 million in deposits. The offices and deposits and a matching amount of assets are being purchased by United Bank, based in the nearby village of Zebulon, Georgia. United Bank already operated across the area generally south of Atlanta, so this acquisition is a natural geographical extension to the west.

First Coweta Bank was founded in 2004, but did not really get going until 2005 and 2006. It was a bad time for any bank to get started in real estate lending in the United States, and First Coweta Bank’s location on the fringes of the suburbs of a metropolitan area is also problematic, as a high proportion of residential development projects in such areas have been abandoned. By the middle of 2009, only two thirds of its loans were still current.

The FDIC estimates its costs for this closing at $48 million.

Then, one state to the west, Alabama closed CapitalSouth Bank, which had 7 offices located mostly around Birmingham, and 3 more in Jacksonville, Florida. It had $546 million in deposits. The offices and deposits and most of the assets are being sold to Iberiabank, a regional bank based in Louisiana. Iberiabank already had one office in Alabama, in the port city of Mobile, from its 2007 acquisition of Pulaski Bank. This is not its first acquisition of a failed bank; a year ago, it acquired the deposits of ANB in northwest Arkansas.

CapitalSouth surely did not realize the extent of its financial difficulties in 2007, or it would not have purchased a troubled Florida bank at that time. It has not reported a profit since, and a few weeks ago sold off a fourth Florida office in an attempt to downsize its operations.

Alabama banking authorities closed banks on consecutive Fridays after not having to close a bank in nearly a quarter century. The FDIC estimates a cost of $151 million from closing CapitalSouth.

Thursday, August 20, 2009

Flu and recession make a tricky combination, especially when it comes to the workplace.

Workers are especially reluctant to be away from the workplace when the job market is weak and unemployment is around 10 percent. Workers believe, often correctly, that they are more likely to keep their jobs if they are seen hard at work. Yet the best thing for the community is for workers to stay home especially for the first week after they contract flu and to have the smallest possible physical contact with the workplace, public transportation, and other public places during that time to minimize the risk of spreading the flu virus.

In this way, a recession can make flu spread faster through the workspace than it would normally. This is a special concern this year, as the U.S. Department of Health of Human Services and Department of Homeland Security are preparing for a flu season that is expected to affect two to three times as many people as usual because of the new H1N1 strain that has been spreading across North America and worldwide this summer.

Employers can encourage employees to stay home if they might have flu, but that is not likely to help much, as a person with flu is the most contagious during the two or three days before the symptoms become obvious. And so a more important adjustment employers can make is to change cleaning practices, cleaning hand-contact surfaces — doors, rails, telephones, elevator controls — several times a day. Workers, for their part, can wash their hands frequently.

Unfortunately, flu will slow down the economy, as affected workers are unable to work or are working less productively than usual for several days or weeks. People shouldn’t worry about the flu-related slowdown in the economy being part of a long-term trend. The flu season will end after about 8 months, and it is the longer-lasting trends that will determine where the economy goes from there.

Wednesday, August 19, 2009

It was employee pricing that drove the old General Motors Corporation into bankruptcy. I’m not talking about employee pricing for employees, of course, but that time when, as a gimmick, they offered the employee discount to the general public. So many extra people went out and bought cars that there were no customers left to buy a car during the next two years. Sales tanked. To make matters worse, the linear thinkers at GM extrapolated the sales gains from the promotion and decided they needed to build lots of extra cars at the exact time when no one was buying them.

Well, here we go again. This time, it’s a government program that is providing a sudden spurt of car buying, this month and this month only. The Cash for Clunkers program is meant to improve our national fuel efficiency, and at the same time, allow Detroit to sell off its huge excess inventory so that maybe it could stay in business and not go bankrupt.

And GM’s response? Instead of taking the chance to reduce its inventory while it can, it’s making plans to boost production — not now, when the extra cars could conceivably be sold to the Cash for Clunkers shoppers, but around November, after it is too late to matter. After Cash for Clunkers, sales will fall off to a lower level than before, because many of the potential buyers will have made their purchases already. It will be the same thing that happened with the employee pricing promotion. GM will have a huge inventory on its hands and no one to buy it.

The new GM is repeating the exact same mistake that led the old GM into bankruptcy. And the result? Well, it’s hard to have a good feeling about it.

Tuesday, August 18, 2009

Today’s housing report says definitively that the summertime rush of residential building is winding down.

Construction normally picks up in summer, in part because summer weather makes construction easier to do. It picked up in a big way this summer as builders finally got financing for their new projects, buildings that were drawn up more than a year ago. But once these new apartment buildings are complete, builders and bankers will not be rushing to get new projects started.

Part of the problem is that apartment vacancy rates are rising in most areas, even as more people move into apartments after foreclosures drive them out of their houses. People typically rent apartments to be near their jobs, and with employment continuing to decline, the need for apartments is declining.

Apartment vacancies will put downward pressure on rental rates, especially in the middle levels. This is already being seen in New York, where building managers are unfamiliar with vacancies and may be frightened by the prospect of having multiple housing units vacant at the same time in the same building. There are reports of building owners voluntarily lowering rents by 10 to 30 percent to keep more of their tenants in place.

Another measure of the decline in construction is the report from Home Depot, where revenue was down 9 percent from a year ago. This means that do-it-yourselfers are not picking up the slack from the construction industry’s slowdown. The pace of construction has fallen off only about 36 percent from last year, so there is plenty of room for it to decline further — indeed, with demographic trends working against it, it will be somewhat surprising if the pace of construction returns to these heady levels at any time in the next 15 years.

Monday, August 17, 2009

This year’s North Atlantic hurricane season might have been slow to get started, but I hope no one was lulled into a false sense of security . . . because over the weekend, two tropical storms made landfall and a third developed into a hurricane.

That makes it a good time to talk about being ready to evacuate, and if you have a car, this subject tends to focus on your car. When you have to get yourself out of danger, it makes sense to get your car out of danger too. Being ready to evacuate can include:

Keeping a map in the car. When everyone is trying to get out at once, you might need to know what the alternate routes are.

Not parking the car with the fuel gauge on “E.” When you’re in a hurry to get out of town, it’s a bummer to have to stop for fuel first.

Now that more people are driving limited-range electric vehicles, some new thinking is required for evacuation plans, and this goes beyond the obvious step of recharging the car when you park it for the night.

Some electric vehicles have a range as little as 35 miles. That could be as far as you need to go in a typical evacuation, but if you need to go farther, that could mean knowing where you can stop to recharge the car, or where you can park it in relative safety and then proceed by other transportation.

Emergency planners can help out in large-scale evacuations by providing buses from designated park-and-ride lots 20 miles or so from the population centers that are evacuating. They can also help by coordinating recharging locations when people are evacuating the day before a hurricane and there is still time to stop to recharge.

As long as flooding is not an issue, evacuations are easier to do with electric vehicles. Electric cars (and electric hybrids) have an advantage in the heavy traffic that often comes in an evacuation. Fuel-burning vehicles use more fuel in stop-and-go traffic, and in the worst case, could run out of gas after half a day of slow going. Authorities sometimes have to round up extra fuel for gas stations along an evacuation route to keep the cars rolling. An electric vehicle, though, will go just as far as always no matter how slow the traffic is.

Sunday, August 16, 2009

Retailers prepared for a down Christmas shopping season, yet shoppers still caught them off guard with how little they bought in December. Since then, the economy has declined further, so could the back-to-school shopping season possibly compare to last year’s results?

Well, no, of course not. Children and adolescents are supposed to be the most reliable clothing shoppers, as they change sizes almost every year, but that doesn’t mean they can’t cut back and trade down when they go shopping. The New York Times gets a pretty good sense of the situation in their story, “Retailers See Back-to-School Sales Slowing.” The story contains the memorable quote from a forecaster, “This is going to be the worst back-to-school season in many, many years.” Retailers planned for sales 4 percent lower than last year, but are finding that in the largest back-to-school categories, sales are off more than that.

Many shoppers are going home with just two pairs of jeans and two pairs of shoes and are compromising on style to get better prices. But at the same time, many are not showing up in the stores at all, perhaps shopping in used clothing stores, putting off the shopping trips until school actually starts, or making do with what they already have.

The Times says pencils and notebooks are selling about as well as ever, but I am skeptical of this report after going into stores and not seeing the usual August school-supply displays set up. Nevertheless, it tells you how much things are declining when the few bright spots in the shopping season are the areas where sales seem to be about the same as the year before.

Saturday, August 15, 2009

The U2 360° tour is the only music tour I know of to have people protest the design of its stage. David Byrne, touring Europe at the same time, called the U2 staging “extravagant” and “overkill” even as he thanked the band for helping to keep his tour promoter in business. Protesters delayed the removal of the stage from a stadium in Dublin as they objected to the noise of the round-the-clock work of the concerts there, much of which involved trucking the stage in and out of the stadium. A few environmentalists have called the tour’s carbon footprint, much of which reflects the cost of transporting the staging, “massive” or “colossal.”

But some perspective is called for in this kind of discussion. If you’re going to question the cost of producing something, you have to balance that with the value of what’s being produced. When the subject is live entertainment, the value can be measured by the number of people being entertained. David Byrne criticizes “200 semi trucks crisscrossing Europe” (his own tour crew’s estimate) for the U2 tour, but the number of trucks required isn’t so much after you consider the number of people in attendance. U2 is playing to audiences around 50,000 along its tour. That could be around 1 truck per 250 audience members. That’s a ratio probably slightly better than that of Byrne’s own tour, based on what Byrne has written about the places he is visiting. Extravagant? It would seem more fair to call it proportionate.

You can apply the same sense of proportion to the estimated carbon footprint, which is said to be similar to the carbon usage of 10,000 people in an industrialized country. That sounds like a lot until you compare it to the crowd of 88,000 at Wembley, at which point it starts to look rather efficient. That is to say, the ultimate carbon usage might actually be less than if all those people had gone about their usual evening activities instead of going to the U2 concert.

Even the cost of building the stage, estimated at roughly $30 million, is not out of proportion when you look at the purpose behind the unusual design — to allow an unobstructed view of the performers for almost twice as many seats as a conventional tour stage. This increases the tour’s box office potential by more than $1 million per show. At this point, there is no telling how long the tour might go, but if the band’s last tour is any guide, the stage will pay for itself long before the tour is over — and that’s not even considering the possibility that the stage will still be good for something after the tour is over.

Friday, August 14, 2009

The banking crisis has made its way to Nigeria, where the central bank today took over five banks and fired their executives. The five banks lost money in bad loans, and there were questions about the propriety of some of the loans — essentially the same story that has been seen around the world during the last year.

The bank that CIT Group owns isn’t in any particular trouble, but still, as a bank holding company, CIT has to live up to the Fed’s liquidity rules. Liquidity is an area where CIT has fallen short this summer, although a payment deadline today was met with days to spare. An agreement with the Fed gives CIT until October to come up with a financial plan that will provide sufficient levels of capital through next year.

Mortgage rates are up sharply from their lows of April and May. Mortgage rates are a double-edged sword for banks. Higher rates mean more interest income for banks, but they also reduce the market value of real estate, making it harder for banks to foreclose, and they lead to a greater risk of defaults.

Banks have become the owners of huge swaths of commercial real estate as developers and landlords become insolvent and banks foreclose on retail and office centers. That’s a trend that is likely to accelerate next year. Normally, banks would sell foreclosed real estate at auction, but they would be reluctant to sell off income-producing properties at a loss. There have been suggestions that the Fed, FDIC, and Treasury might have to create an investment fund to purchase much of this real estate in order to improve the liquidity of the banks. Alternatively, this is a task that might be handled through the the Public-Private Investment Program for Legacy Assets (PPIP).

The troubles at Colonial Bank may also be a threat to Bank of America. Bank of America yesterday claimed that Colonial Bank was holding $1 billion in mortgage funds as a custodian for Ocala Funding LLC, for which Bank of America says it is the collateral agent. It filed suit, asking a federal court to preserve the assets in question. That would be equivalent to about 4 percent of Colonial Bank’s liabilities, and could have basically the same effect as a run on the bank. Bank of America might have filed the suit yesterday in anticipation of Colonial Bank being put into receivership today, and the court seemed to view it in that context, as it issued a temporary order today freezing the assets. It is not clear how much effect the court’s order will ultimately have, but at least that is a matter that can be sorted out later.

While Bank of America may end up protecting its interests, this story does not make it look good. If Bank of America’s allegations are basically correct, then it was taking unnecessary risks with assets it was responsible for, either out of neglect or as a reflection of a high-risk management approach.

The stock market suspended trading in Colonial Bank today as word leaked out early that Alabama banking officials would shut it down tonight and the FDIC would sell its deposits and offices to regional banking giant BB&T, which operates mostly in Virginia and North Carolina. BB&T already had a presence in Florida, but would significantly expand that and reach around the Gulf Coast to Texas.

The FDIC confirmed that transaction with an announcement around 6 p.m. ET. With 346 offices and about $25 billion in assets, Colonial Bank is the largest bank to fail so far this year and the 6th largest bank failure in U.S. history. It is not too much smaller than the $32 billion IndyMac failure last year.

BB&T is buying 88 percent of Colonial Bank’s assets. The FDIC is estimating a cost of $2.8 billion for the Colonial Bank closing, but that is a number that could easily go higher if real estate values in Florida decline further.

It is the first bank chartered in Alabama to fail since 1987, a notable contrast to the state to the east, Georgia, which has seen the greatest number of bank failures since last year.

Colonial Bank had been very active in the consolidation of the banking industry, acquiring nearly one company every quarter over its 27-year history.

The end of Colonial Bank may be the beginning of the end for mortgage warehouse lending, according to banking industry observers. That was a mechanism for funding mortgages, and Colonial Bank was one of the largest players in that market, along with Taylor Bean & Whitaker, which shut down last week. Without these two companies, there may no longer be a competitive mortgage warehouse market. Banks will not be able to fund nearly as many mortgage loans, and will be forced to raise interest rates or turn borrowers away. Although BB&T is acquiring most of Colonial Bank’s assets, no one seems to expect it to try its hand at the mortgage warehouse business.

BB&T will probably also want to wind down or sell off the Colonial Bank offices in Nevada, which is outside of its geographical area of focus and does not seem to be an auspicious place to conduct banking business this year. In addition to the Nevada offices affected by the Colonial Bank failure, there was another large bank failure in Nevada tonight. Community Bank of Nevada, in Las Vegas, was closed, and the FDIC was unable to find a buyer.

Instead, the FDIC is transfering the checking and savings accounts to a temporary bank, Deposit Insurance National Bank of Las Vegas, or DINB, at all 12 offices of Community Bank of Nevada. DINB will be managed by Nevada State Bank and will operate for approximately 30 days to allow customers time to move their funds to other banks. DINB will use the Community Bank of Nevada name for check-clearing purposes. Although customers have 30 days, they should start immediately on Monday to open new accounts and move direct deposits and other automatic transactions to those new accounts.

The FDIC will mail checks to holders of CD and IRA accounts.

Community Bank of Nevada had $1.38 billion in deposits. The FDIC estimates that $4 million of the deposits exceeded the insurance limits.

Community Bank of Nevada was involved in the high-rolling real estate development scene in Las Vegas, making loans that were highly profitable during the real estate boom there, but which failed spectacularly when the boom turned to bust. The bank had not yet finalized its first quarter financial reports.

The FDIC will liquidate the assets of Community Bank of Nevada over the coming months. This closing is expected to cost the FDIC $782 million.

Two Phoenix, Arizona, area banks were closed tonight, each with more than $100 million in deposits. One, Community Bank of Arizona, was owned by the same holding company as Community Bank of Nevada. The other was Union Bank, NA, which had just one office, in Gilbert. The offices and deposits of both Arizona banks were sold to MidFirst Bank, which is also buying nearly half the assets of the two closed banks.

MidFirst calls itself “the new bank in Phoenix,” where it has 7 offices open, 18 preparing to open, and still more on the drawing board. It has a longer history around Tulsa and Oklahoma City, Oklahoma, where it has 36 offices.

The two Arizona bank closings are expected to cost the FDIC $86 million.

A small S&L closed tonight in Pittsburgh, Pennsylvania. Dwelling House Savings and Loan Association had $14 million in deposits and a slightly smaller amount of assets. The office and deposits are being taken over by regional bank PNC Bank, which is also buying 23 percent of the assets.

Dwelling House and four of its directors and officers were penalized recently for lax management that the OTS said left the bank open to fraud and money laundering.

The NCUA liquidated a credit union this week, the fifth this year. Community One Federal Credit Union had 21,000 members in Clark County, Nevada. Its accounts were merged into America First Federal Credit Union, which operates mostly in the neighboring state of Utah.

Thursday, August 13, 2009

The now-or-never urgency that some political organizers feel about health care reform is misplaced. So is the all-out effort by the health insurance industry to kill any specific reform measure. This is an issue that, whether any action is taken or not, will not be going away.

As Dr. Andrew Weil has noted in a series of recent posts, even the most supposedly comprehensive reform that might be considered is only a stopgap measure. Real reform has to address the cost of medical services, an issue that is being distorted in the debate over access to medical care. It also has to address the quality of medical care. People recognize that as an important issue, even as they push it aside to debate other issues that are more urgent. But it’s not an issue that can be ignored indefinitely. As Weil puts it:

It’s not a health care system at all; it’s a disease management system, and making the current system cheaper and more accessible will just spread the dysfunction more broadly.

Those who advocate a single-payer system as the solution to everything should note that the United Kingdom is debating these issues anew this year — and the United Kingdom has had a single-payer system for longer than the United States has had an employer-paid health insurance system.

On the other hand, if nothing is done to reform health coverage this year, or if the Blue Dog Coalition plan or any other extremely expensive but ineffectual compromise is enacted, the insurance companies will not have driven a stake through the heart of former Democratic National Committee chair and longtime health care advocate Howard Dean, as one commentator suggested. They will only have lived to fight again next year. By then, another 1 million people will have seen the insurance companies cancel their individual or family insurance policies, and perhaps 4 million will have lost their employer-paid plans. Already, less than half of Americans support the health insurance system in its current form, so as that system kicks out several million customers per year, it is undercutting its own base of political support.

Regardless of what happens this year, the health care problem will not be solved, and more action will be needed. At the rate we are going, this is an issue we will need to address again every year for the next 10 years.

Wednesday, August 12, 2009

A new wrinkle in the well-known connection between poverty and obesity: a study of the U.S. Food Stamp Program, published last month in Economics & Human Biology, found that recipients of food stamps tended to gain weight, sometimes rapidly. The average weight gain was 5.8 pounds, not huge, but enough to matter.

Food stamps themselves may be partly to blame; the program’s rules tend to steer people toward factory-made packaged food, while making it difficult to get fresh local produce. But the greater cause is surely the financial weakness that qualifies a person for food stamps. Poverty leads to choices, including food choices, that have more to do with conserving money than maintaining physical health.

Regardless of causes, a solution is needed. Excess body weight robs a person of energy and vitality, qualities that a person in poverty needs more than anyone. If poverty causes weight gain, and the weight gain causes a loss of energy, and the lack of energy makes it harder to get out of poverty, that is a cycle of poverty; it makes poverty tend to continue. If we can weaken the link between poverty and weight gain, we can reduce the duration of poverty. At least 1 in 9 Americans qualify for food stamps, so this is not a small problem.

One initiative mentioned in 60-Second Science is the Bounty Bucks program that doubles the value of food stamps (up to $10) at participating farmers’ markets in Boston. The program lets food stamp customers buy more produce, but just as important, it helps people find the farmers’ markets where their food stamps can be spent.

This is a tougher challenge in a city like Detroit, but at least a few of the produce markets there now accept the electronic payment cards of that state’s benefits program. The giant Eastern Market was first, two years ago, and the Northwest Detroit Farmers Market just signed on to the program in June.

Tuesday, August 11, 2009

The good news: productivity jumped up in the second quarter, according to the U.S. Department of Labor. The bad news: The improvement in productivity is almost entirely the result of layoffs, facility closings, and bankruptcies — and that trend is sure to continue.

This is the way economic theory says it should go. Imagine that you have two companies, one of which is more productive than the other. The more productive company will tend to be more profitable because its costs are lower; in times like these, that could mean it is breaking even while the less productive company is losing money rapidly. If the less productive company shuts down, the result is an increase in the average productivity.

It works essentially the same way when companies choose which of their factories, stores, and other facilities to close when they have to cut back, and also when they shut down departments and product lines that don’t add much to the company’s operations.

Despite the theory, usually in a recession we see productivity decline. Companies find themselves with excess capacity, too many workers for the work they have to do, but they are reluctant to cut back for a downturn that may last less than a year. This recession is different. Companies are forced to cut back at least enough to break even.

A business cannot simply borrow a few billion dollars this year the way it could in any of the last ten recessions. Banks and business lenders are trying not to make any loans to companies in trouble. If a business does take out that kind of loan this year, often it is just a first step toward bankruptcy.

We see that, most notably, at CIT, which warned this morning that it faces the possibility of bankruptcy as early as August 17 (though Forbes thinks a November bankruptcy is more likely). CIT used to be the go-to business lender until the credit markets turned on it early this year. Now it serves mainly as a cautionary example of how quickly a business can go from profitable to helpless when it loses control of its cash flow.

The business credit market is not improving; it is getting worse and shows no sign of turning the corner this year or next. Businesses still have to cut back as much as it takes to pay their bills. The productivity report shows that businesses have made themselves more profitable by laying people off and closing facilities, and they will do it again as soon as they need to. As unfortunate as it is for the workers who lose their jobs, businesses this year have few other options.

Monday, August 10, 2009

At first, I was a little surprised at how tight local governments are being as they put budgets together this fall. When I looked closer, though, it made sense. Local government revenues depend mostly on local payrolls and real estate values. These have declined and will continue to fall. They may not improve for two or three years after the economy starts to turn around. So instead of stretching their budgets this year with the idea of fixing any gaps with next year’s budget, local governments have to make this year’s budget stand on its own and be prepared to cut again next year.

Local governments can’t count on any help from squeezed state budgets. States are canceling social service programs and leaving communities to pick up the pieces — and state budgets will be squeezed even more in 2011 after federal help expires.

The wild card in local budgets is the possibility of a severe flu season. The new H1N1 flu virus isn’t showing signs of mutating into something more deadly, but that all could change in November when the weather gets colder. Local governments will be on the front lines if a deadly flu outbreak strikes, and they can’t risk being caught flat broke when that happens.

For these three reasons, we can’t expect local governments to take chances trying to stretch their budgets. Instead, services that seem essential will have to be cut back.

Sunday, August 9, 2009

Computers aren’t improving at the rate they were through the 1980s and 1990s. Technology has leveled off, and the three-year replacement cycle many people followed may now have to give way to a much slower replacement cycle, with perhaps eight years between computers.

This change struck me when I realized that my own primary computer, the one I’m writing on now, is 2 years 4 months old. By now, it ought to be conspicuously old, too old to upgrade, but perhaps not quite obsolete yet. Instead, it still seems basically new, and I am still using it basically the way it came out of the box. My only “upgrades” have been a second hard disk drive, a new operating system version, and a replacement mouse. And if I go shopping for a replacement, it is obvious that it is not time to replace it yet.

It must come as a shock to some people when they go shopping for a new computer, only to find that their computer from three years ago is still state-of-the-art. The replacement for my computer would have basically the same clock speed (actually 11 percent slower — can you believe that?) and essentially equivalent specs. The only big change is the price, 35 percent less than I paid in 2007. That’s progress, of course, and it’s nothing to sneeze at, but it doesn’t give me a reason to replace my computer. To double-check, I looked at a competing computer manufacturer’s online store. There I could select an equivalent system for almost the same price. There was also an option to buy a faster system, but it would cost $1,200 more, and it would be only 7 percent faster. A 7 percent change in speed, of course, is barely noticeable. If you go to the trouble of getting a faster computer, it ought to be at least twice as fast — at least, that’s what we came to expect in the 1990s, when clock speeds (that’s the basic speed of a computer) increased by a factor of 100 in 10 years. Clock speeds have only doubled in the 9 years since — that tells you how much things have changed.

Most businesses have suspended computer replacements anyway to cut costs. When they get back into it in 2012 or 2013, they may find that they haven’t really missed anything.

Of course, some components of computers continue to improve, especially hard disk drives. Since 2000, typical hard drive capacity has increased from 80 to 500 megabytes, a sixfold improvement as prices fell by half. CRT displays have given way to flat-panel displays. We used to have CD-ROM drives; now, DVD±R drives are standard. All of these are reasons to replace a computer, if you are still using a desktop computer from the 1990s. But then, how long will it be before you would have a reason to replace your new computer? I’m guessing eight years, but obviously, it’s foolish to try to predict the computer business that far in advance.

Software publishers that depend on the computer replacement cycle for much of their revenue will feel the slump in a big way, this year and for at least the next two. But the biggest impact will be on clunky, inefficient software. If software engineers are counting on ever-faster computers to cover up the sluggishness of their products, they will find that that trick doesn’t work any more.

Saturday, August 8, 2009

The Haystack project provides a new example of the viability of a computer network formed by carrying USB flash drives around.

The purpose of the project is to provide uncensored Internet access to those inside Iran’s national firewall. The Haystack program is built on well-known technology, such as encryption and proxy servers. But how do you get the program to people in the first place, when their Internet connections are being monitored?

For that, the Haystack project is turning to USB flash drives. A thousand of those may be enough to get the program, eventually, to a few million people. The Internet can be monitored electronically, but a police state needs intense police scrutiny to detect the movement of USB flash drives. A USB flash drive is so small that security forces can overlook it no matter what means they use to try to detect it. It is also cheap enough that, in a pinch, it can be discarded.

People talk about how decentralized the Internet is, but when people who know each other need an even more decentralized approach, there is still nothing that can replace an actual person carrying data from place to place.

Friday, August 7, 2009

The Colonial BancGroup, Inc. announced today that on August 6, 2009, it was informed by the U.S. Department of Justice that it is the target of a federal criminal investigation relating to the Company’s mortgage warehouse lending division and related alleged accounting irregularities. The Company has been informed that the alleged accounting irregularities relate to more than one year’s audited financial statements and regulatory financial reporting, and the Company’s Board of Directors and Audit Committee are making every effort to determine the impact of these alleged accounting irregularities on the Company’s financial statements and regulatory financial reporting.

No company likes to make a statement like this, but it has an extra element of pathos coming from Colonial Bank. It is a large bank whose fortunes are declining so rapidly, I can only describe the sequence of events as stunning.

Colonial Bank is based in Montgomery, Alabama, but does half of its business in Florida and has offices as far away as Nevada. It has been in perilous financial condition since the fourth quarter of 2008. It reported a pre-tax loss of $1 billion during that quarter, a loss large enough to wipe out about 4 years of profits. More than 80 percent of Colonial Bank’s loans are in real estate, and its financial condition has deteriorated accordingly this year.

All that is bad enough, but it gets worse. Colonial Bank announced a deal to be bought out in April. When investors pulled out last week, Colonial Bank issued a going-concern warning. A going-concern warning is an accounting event by which a company recognizes that it is not bringing in enough money to stay in business.

And that’s just the beginning. On Monday, in what I believe is an unprecedented move, the Special Inspector General of the Troubled Asset Relief Program (TARP) got search warrants for Colonial Bank and a related company. Federal agents executed the warrants on Monday at the Orlando, Florida, Mortgage Warehouse Lending Division of Colonial BancGroup, Inc. and an office of mortgage company Taylor, Bean & Whitaker, which regularly does business with that division, and which had led the investment group that had planned to buy out Colonial Bank. Both companies were cooperating with the investigation and at that point, were conducting business as usual.

On Tuesday, though, the Federal Housing Administration (FHA) suspended Taylor, Bean & Whitaker. The FHA said the lender had failed to disclose a pattern of “irregular” transactions that could indicate fraud. The next day, a similar suspension followed from Freddie Mac. Taylor, Bean & Whitaker immediately shut down its lending operations, canceling thousands of pending mortgages and leaving hundreds of mortgage brokers and small banks to find other channels for their mortgages. It remains in business for now with a skeleton crew, and continues to collect payments on its existing mortgage portfolio.

Then yesterday, Colonial Bank learned that it is the target of a federal criminal investigation. One possible explanation for the sequence of events is that investigators started out looking at the possibility of TARP fraud, then began to question the mortgage accounting practices at both companies.

It was unlikely anyway for a bank as large as Colonial Bank to be acquired in the current financial climate. But it is rare for anyone to acquire a bank under criminal investigation — usually that must wait until after the investigation and any subsequent administrative actions are complete — and it is almost impossible to buy out a company whose accounting records are in doubt. Colonial Bank’s hands are tied; all it can do now is wait for its borrowers’ fortunes to improve.

When the federal government took over Fannie Mae a year ago, there were some who wondered whether that move was really necessary. Yesterday’s quarterly report, it is fair to say, removed any lingering doubt. Fannie Mae’s going-concern warning reads: “We are dependent on the continued support of Treasury in order to continue operating our business.” It lost $15 billion during the quarter, 6 times its loss of a year ago. It needs another $11 billion in government money to keep operating. Bizarrely, it continues to pay dividends.

The U.S. Treasury’s debt limit has been raised twice in the last year, and it is about to be raised again. The current limit, $12.1 trillion, is expected to be exceeded at the beginning of October. The Treasury formally requested the increase today. The debt ceiling is especially important to the FDIC. If the FDIC depletes its Deposit Insurance Fund and then a large bank failure occurs while the Treasury is already near its debt ceiling, the FDIC might not be able to pay depositors immediately.

Two banks in west central Florida were closed tonight. Florida closed First State Bank, which was based in Sarasota and had most of its nine offices in the St. Petersburg area. It had $387 million in deposits. In the same county, the OCC closed Community National Bank of Sarasota County. It had four offices and $93 million in deposits.

The successor for both banks is Stearns Bank, based in St. Cloud, Minnesota. Stearns Bank had already acquired failed banks in Minnesota and Georgia. It is taking over the deposits and purchasing about 97 percent of the assets of the two Florida banks.

First State Bank had been reporting losses, losing $37 million in the last three quarters. Its losses were unusually large, almost twice its revenue during that period. The FDIC warned it two weeks ago that it was critically undercapitalized.

Community National Bank of Sarasota County was also considered critically undercapitalized and had been given a July 17 deadline to raise capital. Its second quarter earnings report, released a week ago, gave it a negative net worth.

The two Florida closings will cost the FDIC an estimated $140 million.

In central Oregon, Community First Bank was closed. Community First Bank had eight offices in three counties, and $182 million in deposits. The offices, deposits, and most of the assets are being purchased by a bank in the neighboring state of Idaho, Home Federal Bank, which has 15 offices near Boise.

Community First Bank had its best year in 2006, reporting earnings of $1.5 million. It did not begin to report losses until a year ago, but the losses were large, over $6 million in the second half of 2008. It had not yet reported results for the first two quarters of 2009. The closing is expected to cost the FDIC $45 million.

Thursday, August 6, 2009

In discussions of the U.S. economy, the meaning of “hunger” has changed.

A century ago, when people talked about “hunger,” the concern was for people who regularly went for days without any food, and could die of starvation. By the middle of the twentieth century, “hunger” would include anyone who could suffer significant health consequences because of eating a small amount of food.

Now it appears that the “hunger” problem includes everyone who runs out of money and needs food assistance. A CNN Money story today about hunger in Detroit describes the embarrassment of “middle-class” people as they ask for food assistance. So far, there is still food, although things could get worse when the harvest season ends. And this is in the hardest-hit city in the United States right now.

It is a big change from the 1970s, when food pantries regularly ran out of food even in relatively prosperous cities such as Baltimore and Tampa.

The change in the economic significance of clothing has been greater than that of food. In 1970 it was commonplace to see clothing with patches on it, and people who were especially hard-hit might extend the life of a pair of shoes by patching the soles with cardboard. In 2009, the clothing people are wearing looks the same as the clothing people were wearing in 2007. Most of it, of course, is the same clothing, and none the worse for wear, or at least you can’t see the difference. More people are buying clothing at thrift shops, but not so many that inventories are being depleted.

Clothing has become so durable we don’t even think of clothing as an immediate problem when money gets tight. Food, though, we need every day, and for the most part, we are finding it. “Lean times” used to be times when most people would lose weight. That is not what is happening now. Instead, even as “hunger” is widespread, the average American has gained weight since last year.

Wednesday, August 5, 2009

Economics is called the “dismal science” because it is about
scarcity and limited resources.
Priorities matter because you can’t have everything you can imagine;
among the things that matter to you,
you have to decide which are the most important.

The cliche of “food, clothing, and shelter”
expresses this idea of priorities.
These “necessities,” or top priorities, come before everything else.
That doesn’t mean that that these are really your most essential physical needs.
The average human’s most urgent needs are oxygen, water, and electrolytes.
These, though, are not the scarce resources that economics is about.
They are available in virtually unlimited quantities, so economics
skips right past them to get to more interesting problems, such as food and clothing.

The nature of “necessities,” though, has been changing in recent decades.
In the 1970s, improvements in textile technology changed the way people relate to
clothing. It is rare now to throw away an article of clothing because is tattered and torn.
Instead, if people throw away clothing at all, it is just to make room for newer, more
interesting clothing.
When a person who already has too much clothing buys more,
it can hardly be called a necessity, so what is it really about?

Similar questions can be asked about food, shelter, and most of the other things
people spend their money on.
If you look at the reasons behind most of the things people buy today, there are
two main purposes or objectives that you will find again and again.
People want to express themselves,
and they want their unique qualities to be recognized by other people.
Most of the money that people spend goes to these two objectives,
self-expression and social recognition.

The challenge that economics faces is that self-expression and social recognition
are not scarce commodities. In economic terms,
self-expression and social recognition are noneconomic.
They can, at least in principle, be found in unlimited quantities.
You can have as much of them as you can imagine.

Self-expression and social recognition could be considered imaginary
products, because they are literally created out of people’s thoughts and imaginations.
Even when physical products are involved,
it is not really the physical work or physical materials that create
self-expression and social recognition.
I believe it is better to think of them as spiritual things, since they are not
made of mere ideas and information, but are something more than that.

Regardless, the question remains:
What is an economy in which most of the money is being spent on spiritual or
noneconomic things?
There is no simple answer, but it seems safe to say that this economy is something
new and different from anything that has come in the past.
It will not be a surprise if we find that many of the basic assumptions of economics
no longer fit the new spiritual economy.

Tuesday, August 4, 2009

After spending the month of June paying for my shopping purchases with cash, I spend the month of July virtually not shopping at all, after a case of flu persuaded me to mostly stay away from public spaces for four weeks. You might think that on my return to shopping, I would have a long list of things to buy, and I would be eager to spend hours at it. Instead, I spent barely ten minutes browsing and bought nothing.

In most economic theory, shopping is a series of decisions about maximizing value. In reality, though, shopping is largely a habit, a practice we keep up whether we need it or not. You know this is true if you come home from the supermarket and spend ten minutes rearranging the refrigerator to make room. If shopping were simply a reaction to need, we would not go shopping for food until the refrigerator was at least half empty — or for clothes until the closet was starting to look bare.

When you interrupt a habit, the habit does not automatically come back after the interruption is over. It is easy to think of examples of this. It is a truism in the restaurant business that reopening a restaurant after months of remodeling is almost the same as opening a new restaurant. The previous regular customers are not waiting at the door when you finally open it again.

It may be a similar story with retail in general. Even if personal income can eventually return to the levels of three years ago, the shoppers will not automatically return to the stores. For some, regular shopping will have to wait until they pay off their home mortgages, and by then, they may find that they are too busy. (The talk of a recovery is speculation at this point anyway. Today’s report from the Commerce Department shows a decline in personal income in June, while consumer spending rose only because of higher prices. If the U.S. economy bottoms out in February 2010, as I have been expecting, household incomes could continue to decline for another year. So the recovery at retail may not get rolling until 2012 — but like any economic forecast that far in advance, that’s little more than a guess.)

Peer pressure is one force that drives people to shop. If everyone else has new clothes, I need new clothes too — but this year, no one seems to be wearing new clothes. And what if new clothes is just a fashion trend that has run its course?

What will the world look like if people forget to go shopping the same way they’ve been forgetting to go to the health club? It could happen — and it could change the shape of the edge of town.

Monday, August 3, 2009

Today’s earnings report from Tyson Foods is a good demonstration of the advantages a business can get by keeping a smaller inventory. The company reported a respectable profit even though sales have declined. Most of Tyson Foods’ profit in the quarter came, directly and indirectly, from lower energy costs. Keeping production and inventory in line was important, though, because it gave the company the flexibility to take advantage of falling costs.

The biggest product category at Tyson Foods is chicken, and that could be tricky to manage. Many people are eating chicken instead of beef, which has come to be seen as more of a luxury item. But chicken prices are going up too, and people are cutting back on the amount of chicken they eat. So are people eating more chicken, or less? Based on the report, it is only slightly more. And by taking a cautious approach to production, Tyson Foods didn’t have to make any big adjustments as it went along. It may be a similar story in the next quarter, when meat demand is likely to fall off. That shouldn’t be much of a problem because inventories are already small, and the company is ready to adjust to whatever changes come their way. As CEO Leland Tollett put it, “I’m feeling much better about our position than I would be if we were sitting on a lot of inventory.”

Sunday, August 2, 2009

Michael Steele doesn’t have an easy job. His task as the head of the Republican National Committee (RNC) is to build the United States’ largest minor party back up to major-party status. To do that, he has to restore the trust of the party’s core Southern supporters while adding an equal number of moderate and independent voters. That’s a tall order, and it couldn’t have helped his mood to have to spend much of last week distancing himself from some crazy conspiracy theories.

According to the most popular version of the “birther” conspiracy theory, Barack Obama faked his qualifications for the presidency by faking the place of his birth. Now, I’m a fan of conspiracy theories myself, but they have to be somewhat logical. It is not even a Hollywood story line when the person who supposedly masterminded a conspiracy was a newborn infant. To give you an idea of how crazy the “birthers” are, the most prominent leader of the movement announced last week that her ideas had been endorsed by the Republican Party. This wasn’t a message that was delivered to her by space aliens. Worse, it was a conclusion she came to after she noticed that Steele, the head of the RNC, was her friend on Facebook. That’s an indication of how removed from reality the birthers are. And Steele had to come out and say that he obviously could not agree with every opinion of every Republican and that the birthers were a problem, a distraction from the country’s real issues.

All that was bad enough. Then on Friday we learned that the birther movement is not the small fringe movement that we thought it was. It is small, to be sure, except within the Republican party, where 58 percent of Republicans have doubts about Obama’s citizenship. It could have been a bad poll, but it was later confirmed, in one state at least, by a different polling company. That compares to about 14 percent of non-Republicans. In other words, about half of Republicans are delusional or gullible enough to believe that the U.S. president faked his own birth.

It’s this kind of outside-the-box thinking that gives minor parties a bad name. “Mainstream” thinking is possible only because people have a degree of intellectual faith in their country. It’s an attitude that says, “If 80 percent of Americans believe this, then I should at least listen to what they have to say, because there must be something to it.” Yes, there are a couple of logical flaws in that thinking, but it serves the purpose of allowing the country to develop a consensus view so that policy decisions can be made. So when you have people saying something along the lines of, “Well, I don’t have to pay any attention to what the vast majority of Americans think, because they’re . . . from Mars!” then you have people who are positioning themselves outside the mainstream, on the fringes of national thought. As Jerrold Post, a political author quoted by McClatchy, put it:

They are not searching for the truth. They are searching for anything that confirms their fixed idea, their malevolent idea . . . It doesn’t soothe people to tell them it’s not legitimate. That makes them angry.

People who are not willing to engage with mainstream thinking — not that they have to agree with it, but they have to tolerate it and take it somewhat seriously — are politically ineffective. So if this is about half of the people in the Republican party, it will be impossible for the party to pull together and get anything done.

The birther movement is a colorful story with no apparent consequence, but we see the same effect in substantive policy issues. Ask anyone who bought a car last week, and they’ll tell you that the Cash-for-Clunkers program was a success. But Republican pundits on Friday were trying to explain that Cash-for-Clunkers was, instead, a colossal failure. This view puts them at odds with the reality of the situation and with everyone who bought a new car under the program, along with all of their friends — millions of people, roughly one fifth of them Republicans. And the audience for Republican pundits is mostly Republican. And so, instead of arguing against the Democrats, Republican pundits took leave of reality in order to argue against Republicans. As long as this kind of thing is occupying the Republicans’ attention, they will never be able to pull together to persuade mainstream thinkers that Republicans have important ideas to offer.

The Republican party has shrunk to minor-party size. At the same time, half of its members are adopting minor-party thinking. Steele is not in on this, of course. It is his job to persuade the world to see the Republican party as a major party. That is a tough challenge in itself, but there is one more challenge that may stop him. There is a movement within the party to have him replaced. Many Republicans find Steele’s point of view a little too mainstream. If the birthers succeed in replacing Steele with someone who is more sympathetic to their half of the party, then they may as well be changing the name of the Republican party to the Birth Certificate party — the party will never be the same again.

Saturday, August 1, 2009

In the 1970s, before rival ethnic groups obtained reliable supplies of bombs and automatic weapons, Lebanon was mostly known to the outside world as a Mediterranean vacation postcard. Some of that is coming back now.

BBC News talked to the tourism minister and found that an estimated 2 million tourists are visiting Lebanon this summer. That’s a large number of tourists anywhere, but in Lebanon, it’s startling. The population of Lebanon is barely 4 million, and such a large influx of tourists is enough to rescue the country’s economy.

The New York Times was ready to take a chance on Lebanon back in January when it ranked Beirut at #1 in its 44 Places to Go in 2009. This week, a CNN report presents Beirut as the location of major music festivals and a “world-class party scene.” All that is true, says Liliane, a software developer in Lebanon, and Lebanon was rarely as sad and dreary as the war news made it look: “We partied while there was war,” she says. It is not that Lebanon’s political troubles are behind it. But after a peaceful election, the hope that the quiet could extend through the summer was enough to bring tourists roaring back in record numbers.

Everyone is noticing Lebanon because of the striking contrast between its internal conflicts and its resurgence, especially in tourism. There are two morals we can take away from this story. The first is that war is not natural. During a war, it can sometimes seem that we are doomed to see the war continue forever. War, though, can keep going only as long as wealthy forces keep feeding the conflict. Without massive ongoing financial support, conflicts tend to fade. When the financial underpinnings of war go away, the transition from all-out war to petty squabble can happen so quickly that it surprises everyone.

The second is that participants and pundits alike consistently underestimate the costs of war. The dead, wounded, and displaced people and ruined buildings are bad enough, but many of the effects of war extend far beyond the time and place of the fighting. The worried tourists who can’t make the trip to the beach are also experiencing one of the costs of war. The loss to each individual, for the people who never see the war, is so small we may be tempted to say it doesn’t count. But so many people are affected in so many ways that these costs too are enormous if you add them up.

It is hard to put the postcard view of Beirut side by side with the war news pictures, knowing that the two images represent alternative outcomes for the same place. The difference you see between the two images tells you the cost of war. Let’s hope we can keep the postcards coming.